When to report forgivable CEBA loans

Surprise reporting requirement complicates biz tax-planning

The Canada Emergency Benefit Account (CEBA) provided two loans to businesses that suffered revenue declines due to the pandemic. They amounted to a total of $60,000, with $20,000 forgivable, if the loan is repaid December 31, 2022. However, as reported in our recent blog, very few expected a 2020 income inclusion. Here are the rules:

The original CEBA loan was for $40,000 and a second CEBA was announced October 9, 2020, for $20,000 for a total of $60,000. In each case up to $10,000 is forgivable, for a total of $20,000. Here’s the catch: To qualify for the forgiveness, the non-forgivable portion ($40,000) must be repaid on December 31, 2022. The loans are also interest-free until then. So when is the forgivable amount declared as income, assuming loan repayment is made on time? CRA has confirmed their interpretation, which is that the forgivable portions of the two CEBA loans are taxable on receipt of the loan.

Many taxpayers may not have anticipated this income inclusion for the 2020 tax year, and it’s important to consult with your tax advisor to make see how this impacts you if the loans were received in that year. Note that when the balance of the loan is repaid by the deadline, there are no further tax consequences down the line. But, if a business cannot afford to repay any of the loan by December 31, 2022, the full amount of the loan is repayable. The outstanding amount becomes a term loan attracting a 5% interest rate. When that happens, an adjustment to the income inclusion will have to be made. In that situation, a deduction will be allowed for the previously reported income amount.

Further down the line, what happens if the taxpayer defaults on the term loan? In that case, if further forgiveness is required, regular debt forgiveness rules under Section 80 of the Income Tax Act will apply.

Business owners should consult with their advisor, such as a DFA-Tax Services Specialist, to discuss these rules and how they impact 2020 taxes payable as a result of this complexity.

Evelyn Jacks is an award-winning financial educator, best-selling author, tax expert, and founder of Knowledge Bureau™, a widely respected financial education institute and publisher which has welcomed thousands of students from the various financial services to its online and in-class programs. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

Advisors: Get the credentials to help clients as a DFA-Tax Services Specialist™. The 2021 Advanced Personal Tax Course from Knowledge Bureau is a certificate course that can also help you get up-to-speed for the upcoming tax season, and the 30 CE/CPD credits you’ll earn can be used towards your Designation.